(12-1) Broussard Skateboard\'s sales are expected to increase by 25% from $8.0 m

ID: 2645302 • Letter: #

Question

(12-1) Broussard Skateboard's sales are expected to increase by 25% from $8.0 million in 2013 to $10.00 million in 2014. Its assets totaled $4 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

AFN = $700,000

Sales expected in 2014

=$10,000,000

After-tax profit margin

($10,000,000*3%)=$300,000?

Dividend payments [$300,000 *75%]=$225,000?

Addition to retained earnings [$300,000 - $225,000]=$ 75,000?

All the profits after the payment of dividend will be an addition to retained ?earnings. As the assets are already at full capacity, all the assets should grow at the sales rate. It is to be noted that if the assets were not at full capacity, only the spontaneous assets would increase.

Increase in assets = $4,000,000*25%=$1,000,000?

Increase in liabilities = [$450,000+$450,000]*25%=$225,,000?

For current liabilities, only the accounts payable and accruals are treated as?spontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.?

Additional Funds Needed = Increase in assets - increase in liabilities - retained earning= ?

$1,000,000 - 225,000 - 75,000 =$700,000 ANSWER